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How to Measure Damages from Failed Development Deals: Superior Court Weighs in

Published on: March 2022 | What's Trending

Unhappy businessman feeling stressed about bad news on a piece of paper.

This column was originally published on the Real Estate News Exchange (renx.ca).

After a recent large-scale development deal failed to close, the Ontario Superior Court provided guidance on how damages should be measured when commercial real estate transactions go wrong. The court also ruled damages which could result from the registration of a certificate of pending litigation (a “CPL”).

In WED Investments Limited v. Showcase Woodycrest Inc., 2021 ONSC 237, three parties entered into a deal for the purchase of land for development. WED Investments Limited (the “Buyer”) entered into Agreements of Purchase and Sale (the “APS’”) with Showcase Woodycrest Inc. (“Showcase”) and 2442459 Ontario Inc. (“244”) (collectively, the “Sellers”) to acquire two properties in Whitby, Ontario (the Brock Street Property and the Hopkins Street Property, respectively) for a residential development. The Brock Street Property is owned by Showcase and the Hopkins Street Property is owned by 244. The sole owner of Showcase, Elliot Kirshenbaum (“Kirshenbaum”) is also one of the owners of 244.

Both APS’ contained conditions that the Buyer was required to waive by a specified date, failing which the agreements would be void and the transactions terminated. The Buyer provided a waiver on time for the Brock Street Property but not for the Hopkins Street Property due to an unexpected issue. As a result, the Sellers took the position that both deals were terminated.

The Buyer commenced an action against the Sellers and registered CPLs on both of the properties. The Buyer claimed that the Sellers breached both of the APS’ and alleged that the Sellers wanted to get out of the deals due to the rise in the real estate market since the agreements had been negotiated.

The Buyer initially sought specific performance, but that claim was abandoned prior to trial. Instead, the Buyer claimed damages in the form of profits that it would have made from redeveloping the properties or, alternatively, from their increase in value. The Sellers counterclaimed, seeking damages arising from their inability to sell the properties due to the CPLs.

The Brock Street Property

The Buyer argued that the APS for the Brock Street Property was valid and binding because the waiver was delivered in accordance with the agreement. Showcase argued that the agreement could not be enforced because the waiver was delivered by email and not by hand, as required under the APS.

The APS provided that any notice related to the agreement was to be in writing and had to be delivered personally. However, the Court noted that the APS provided that if there was a conflict or discrepancy between any provision added to the APS and the standard portion, the added provision would govern. Schedule A to the APS provided that there must be delivery of written notice of the waiver to Showcase; however, it did not specify how it was to be delivered. This constituted a “conflict or discrepancy” according to the Court, whereby the Schedule took precedence.

The Court also looked at the contract as a whole, the surrounding circumstances, the purpose of the notice provision, and the nature of the relationship of the parties and their conduct. It was held that these factors supported a finding that the parties’ intention was to communicate by email on all issues. The Court deemed it unfair to hold one party to a strict reading of the APS regarding the delivery of the notice, as the parties’ clear practice of communicating by email contradicted this.

As such, it was determined that the delivery of the waiver by email was compliant with the APS, and therefore the agreement was wrongly terminated by Showcase. This gave rise to a claim for damages by the Buyer.

The Hopkins Street Property

Over the course of the transaction, a number of issues arose with the Hopkins Street Property, which resulted in 244 extending the deadline by which the Buyer was to provide its waiver. However, the Buyer did not ultimately deliver the waiver on time, which resulted in 244 terminating the APS.

The Buyer stated that its failure to deliver the waiver was due to reliance on representations made by Kirshenbaum that 244 needed more time to address the issues with the property. However, the Court rejected this argument, and found that the Buyer and 244 orally agreed to a final deadline and that no further extension was agreed upon. The Buyer failed to meet this final deadline and the APS became null and void as a result.

It was therefore held that the Buyer was not entitled to claim damages against 244 as a result of the failed transaction.

Measure of Damages

The Buyer advanced two bases for calculating damages: (a) the lost profits it would have earned had it acquired the properties and redeveloped them; and (b) the increase in value of the properties as undeveloped land, as calculated on the expected closing dates.

In assessing damages for the Brock Street Property, the Court first considered the opinions of two urban planners obtained by the Buyer and Showcase. The Buyer’s urban planner proposed a high-density development, whereas Showcase’s planner found this not to be feasible and instead supported a medium-density development.

The Court found Showcase’s urban planner’s proposal to be more pragmatic. It was also noted that the proposal given by Buyer’s planner had several issues which would likely not have been approved by the municipality. The Court held that a smaller-scale project was more likely to have been approved.

The Court then assessed the opinions of appraisers called by the Buyer and Showcase regarding the potential revenue that may have been earned had the redevelopment occurred. The Court arrived at square-footage figures it deemed appropriate for apartments and townhouses that would have been developed, based on the estimates provided by the appraisers.

Lastly, the Court looked at the potential construction costs of the project based on the Buyer’s surveyor’s analysis. The Court held that the lost profit approach to damages was speculative and uncertain because it did not factor in the likely scenario that the Buyer’s high-density development proposal would not be approved.

The Court then considered an alternative damages approach, which was to look at the increase in the value of the land on the expected closing date, based on the opinion of the Buyer’s appraiser. The appraiser treated the property as vacant land for medium-to-high density development and compared the property to sales of comparable properties in the region, making adjustments that she deemed appropriate. The Court agreed with this approach and found it appropriate to assess damages reflecting the difference in value from the time the APS was executed and the closing date, which was $3,200,000.

In regard to the Hopkins Street Property, the Court considered what it would have calculated the damages to be had it concluded that 244 breached the APS. The Court used the method of calculating damages based on the increase in value of the property, undeveloped, from the date of the APS to the closing date to arrive at a hypothetical damages amount.

The Sellers’ Counterclaim

In assessing whether the Sellers were entitled to claim damages as a result of the CPLs, the Court stated that the burden of proof was on the Sellers to demonstrate that the CPLs were registered “without reasonable cause” or “without a reasonable claim to an interest in the land.”

In this case, it was held that since the Buyer succeeded in its claim arising from the Brock Street APS, the counterclaim by Showcase failed. It was also noted that Showcase continued to bear the costs of the property, which had increased significantly in value, despite knowing about the Buyer’s CPL. There was also no evidence of attempts by Showcase to sell the property. The Court therefore concluded that Showcase did not suffer damages as a result of the CPL on the property.

Regarding 244’s counterclaim arising from the CPL on the Hopkins Street property, it was held that, although the Buyer’s claim was ultimately unsuccessful, it did not act unreasonably in claiming an interest in the property. Moreover, had the Court concluded otherwise, it would not have awarded damages to 244 arising from the CPL, since 244 had not proven that it sustained any damages. The property had also increased significantly in value by the time the CPL was removed and 244 took no steps to sell the property while the CPL was still on title. This supported the Buyer’s claim that 244 terminated the APS because it realized it could sell the property for much more than it had agreed to with the Buyer. The Sellers’ counterclaim was therefore dismissed.

This decision follows the principle recently affirmed by the Ontario Superior Court in Akelius Canada Inc. v. 2436196 Ontario Inc. where a party’s claim for damages for lost opportunity in a failed large-scale real estate transaction was rejected by the court.

In Akelius, two real estate investors entered into an Agreement of Purchase and Sale in 2015 for seven residential apartment buildings in Toronto for a negotiated purchase price of $225,400,000. After the agreement was executed and prior to closing, the buyer discovered that there were $48 million worth of outstanding mortgages encumbering the properties, which constituted a breach of the agreement. The buyer sued for breach of contract and the sellers eventually sold the properties in 2018 for about $50 million more than the original purchase price. The buyer sought $50 million in damages, reflecting the appreciation realized by the sellers, as well as about $770,000 in sunk costs that it incurred from the failed transaction.

In the end, the buyer was only awarded damages for the amount of sunk costs thrown away on the transaction. The buyer’s claim for damages for lost opportunity was dismissed.

These decisions are important insofar as they provide guidance on measuring damages from failed development deals. These decisions also show how difficult it is to reap damages for lost opportunity, even where buyers are unfairly deprived of lucrative opportunities.

The WED Investments decision also shows when damages can be claimed as a result of a CPL. Even if a buyer is not successful in claiming damages from a transaction that goes sideways, this does not necessarily entitle the seller to damages from a CPL.